We feel compelled from time to time to write about behavioral finance – in particular, which actions investors take (frequently bad) when they observe irrational, illogical dips and jumps in the markets which appear to be opposite of what is expected.
A case in point: On Thursday, the FED kept interest rates unchanged. Low interest rates is a good thing for the real estate market, car sales, low mortgage rates, lower gasoline prices, many other things to help the consumer, and higher business profits. What does the stock market do in reaction to this good news on Thursday and Friday? It dropped!
Today (Monday), oil prices rose in response to unconfirmed rumors of OPEC cutting production. And, interest rates on longer term bonds moved higher. Both were bad news for the stock market; but, what did the market do? It jumped over 125 points.
These irrational, illogical moves in the stock market can cause human emotions to take over and heavily influence investors in their decision making process IN A NEGATIVE WAY IN THE SHORT TERM.
But in the long term, the stock market IS rational. So, we will write several articles in the future to explain some examples of behavioral finance in real life to help you avoid letting your emotions cloud your investment judgment. BUT, FOR THE TIME BEING, WE RECOMMEND YOU KEEP AN EYE ON THE “HEAT MAP” (BELOW) WHICH SERVES AS AN EXCELLENT TOOL TO KEEP THINGS IN PERSPECTIVE OVER A LONGER PERIOD.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is increased to B+ (very favorable). Gasoline prices continue to drop. Imports have become cheaper due to the strength of the U.S. dollar. Low interest rates will help real estate, an important component for the consumers’ wealth effect. These trends put more money in the pockets of Americans coming into the all-important Holiday shopping season.
THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices. The FED kept interest rates unchanged last week. The next big milestone is Fed meeting will occur Oct 27-28.
BUSINESS PROFITABILITY: This factor’s grade is a C (average).
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 6 due to continued signs of a slowdown in China. These risks deserve our ongoing attention.
Last week, Bonds and Foreign Stocks increased but U.S. Stocks declined. During the last 12 months, BONDS outperformed STOCKS.
Returns through 9-18-2015
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.3
1.0
3.3
1.8
3.2
4.6
US Stocks-Standard & Poor’s 500
-.1
-3.5
-.6
12.7
14.1
6.9
Foreign Stocks- MS EAFE Developed Countries
.6
-1.4
-7.8
6.2
5.4
3.5
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week, Laurie and guest host Attorney Charles Stopp, partner of the law firm of Steckel & Stopp will discuss: “Trusts and other interesting estate issues”
Laurie and Attorney Stopp will take your calls on these topics and other inquiries this week. This show will be broadcast at the regular time. Questions may be submitted early at yourfinancialchoices.com by clicking Contact Laurie. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville and Macungie area – or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Valley National is growing and we are searching for the right individual for a full time, year round position. We need your help. If you know someone who fits the description below, please forward this to them and ask him or her to apply online or contact us directly.
Valley National Financial Advisors is seeking an experienced tax professional to serve in a dual role as senior tax preparer and financial planning specialist. Responsible for income tax preparation for individuals and companies in addition to year-round tax planning and financial analysis, recommendations and calculations. Must be able to work independently as well as in conjunction with Financial Advisors to serve our clients.
The professional in this role: Identifies potential tax credits and liabilities and ensures accurate and complete returns are filed in a timely manner. Completes tax forms in accordance with policies and in compliance with legislation and regulations. Ensures our clients receive fast, accurate, professional services, with the best possible outcome for the tax challenges they face or the ongoing services they need.
Qualifications / Desired Skills:
5 years of direct 1040 tax preparation and review experience, preferably for a high-volume, reputable tax firm
3-5 years of experience in financial analysis, including tax planning recommendations and calculations.
CPA or EA designation, or currently pursuing
Extensive knowledge of Federal, state and local PA tax rules and regulations
Understanding of investments and cash-flow projections.
Strong candidates will be well versed in working with the following…
ProSystems / CCH Axcess
Adobe Acrobat (PDF documents)
Microsoft Word, Excel, Outlook
IntelliConnect familiarity and SurePrep experience, a plus
NaviPlan (desired – or other financial planning software experience, a plus)
Candidates MUST have an ability to work independently and work alongside other financial planning professions to make an impact for clients and the firm.
Candidates should desire to use their strong tax knowledge to expand their career to include individual financial planning/forecasting.
Primary responsibilities:
Preparation and filing of tax returns for clients (individual and small business).
Daily client interaction as required to complete client tax returns, and assist clients with tax related notices and audits.
Updating software to include all high priority cases and managing tasks effectively through software.
Updating client information and status in both the tax software and client management system.
Responding to problems, interfacing with appropriate key people and departmental personnel so that client needs will be handled correctly and promptly.
Work alongside Financial Advisors to perform client tax projections, year-end calculations, and ad hoc tax projects.
Master financial software and learn to input key data points quickly and efficiently.
Assist Financial Advisors and other tax preparers with tax extensions post 4/15.
Draft specific tax recommendation as part of the client financial planning process.
Research complex tax items via IntelliConnect.
Master specific tax software systems, in order to help train and mentor new tax preparers.
At times, meet with prospects/clients to gather data for planning projections.
Salary exempt classification. Salary based on experience. Full benefits, including 401(k), paid time off, paid vacation, health insurance, dental, vision, life insurance, long-term disability.
Stocks stumbled last week amid concerns about slowing global growth, set off by the Federal Reserve decision not to raise interest rates. The broad market fell slightly for the week ended Friday, reversing the nearly 2% rise that had been reached ahead of Thursday’s Federal Open Market Committee meeting. Prior to the meeting, market participants appeared pretty evenly divided as to whether there would be a hike. Yet Friday’s big losses suggest that an increase was expected, if not desired, by investors.
The FOMC left the federal-funds target rate band unchanged at zero to 0.25%. Fed Chair Janet Yellen highlighted weak signs of inflation and the potential negative impact of global economic and financial developments on the U.S. while implying that the Fed had been ready to raise rates.
Last week, the Dow lost 0.3%, or 49 points, to 16,384.58, and the Standard & Poor’s 500 index lost three points to 1958.03. The Nasdaq Composite bucked the trend slightly and rose 0.1%, or five points, to 4827.23.
The worm has turned—perhaps permanently—when it comes to the market’s reaction to Fed efforts to keep rates low. As recently as this past spring, the central bank’s reluctance to hike occasioned stock rises and celebrations. The same stance now has investors fretting about economic growth in the rest of the world and the attendant impact on U.S. multinationals’ corporate profits.
The current easy-money policy, which has worked for six years, is no longer enough to get stocks going, says Steven Sosnick, senior trader at Timber Hill. Another round of quantitative easing would be fraught with difficulties, given that it would indicate lack of growth, which would spook investors. At some point the economy has to deliver, he says.
John Manley, chief equity strategist at Wells Fargo Funds Management, remains optimistic that the U.S. economy will revive. Manley “guesses” there will be a hike next month, and that the market will view it positively. It will be viewed as a neutral stance, not “tightening,” and “the Fed saying the U.S. economy is OK.”
The parlor game—will the Fed raise this year?—goes on, with two more FOMC meetings left: Oct. 27-28 and Dec. 15-16.
The Fed is beginning to lose credibility, Kenneth Polcari, director of NYSE floor operations at O’Neil Securities, suggests. The Fed could have hiked back in the spring, when the world seemed to be in a better place economically. “A 25-basis-point [increase] is nothing…but now the Fed is backed into a corner,” he says. “Will it be October or December? That’s a bad place to be.”
Yellen has also opened the Pandora’s box of a third Fed mandate, related to global growth, in addition to those pertaining to employment and inflation, he says. What will happen in December, if global markets and economies are still in turmoil, he asks. Does U.S. monetary policy depend on that now?
Expect volatility over the next few weeks as the market searches for directional signs. On Thursday, Yellen’s planned speech on inflation could move stocks. Then third-quarter earnings season kicks off in the second week of October, giving investors a better sense of how the slowdown in emerging- markets growth has affected corporate profits. Until then, the market might lurch about without much sustained direction.
